The Social Security Administration announced this morning that the annual cost of living adjustment in 2022 will be 5.9%—making it the highest Social Security inflation adjustment in 40 years.
The 2022 COLA will increase an average monthly retirement benefit of $1,565 to roughly $1,657, an increase of $92. The average retired couple’s collective payment of $2,599 per month will increase to $2,753, an extra $154 monthly for two people.
The 5.9% 2022 COLA will increase an average monthly retirement benefit of $1,565 to roughly $1,657, an increase of $92.
Social Security Administration
While high inflation is obviously behind next year’s big increase, over the past 12 years, Social Security COLAs have averaged a meager 1.4%. Inflation was so low that no COLA was payable at all in 2010, 2011, and 2016, and in 2017 the COLA was almost zero, just a 0.3 percentage point.
The 2021 COLA was just 1.3%, which raised average benefits by only about $20 per month to $1,543.
“This would be the highest COLA that most beneficiaries living today have ever seen,” says Mary Johnson, Social Security and Medicare policy analyst for The Senior Citizens League.
Approximately 70 million Americans will see the increase beginning with benefits payable to more than 64 million Social Security beneficiaries in January 2022. Increased payments to approximately 8 million Supplemental Security Income (SSI) beneficiaries will begin on December 30, 2021. (Note: some people receive both Social Security and SSI benefits).
Some other adjustments that take effect in January of each year are based on the increase in average wages. Based on that increase, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $147,000 from $142,800.
The maximum amount of earnings subject to the Social Security tax will increase to $147,000 from $142,800.
Social Security Administration
Social Security and SSI beneficiaries are normally notified by mail starting in early December about their new benefit amount. Most people who receive Social Security payments will be able to view their COLA notice online through their personal my Social Security account, which may be created or accessed online at www.socialsecurity.gov/myaccount.
Information about Medicare changes for 2022, when announced, will be available at www.medicare.gov. For Social Security beneficiaries receiving Medicare, Social Security will not be able to compute their new benefit amount until after the Medicare premium amounts for 2022 are announced. Final 2022 benefit amounts will be communicated to beneficiaries in December through the mailed COLA notice and my Social Security’s Message Center.
COLA struggles to keep pace with inflation
The annual COLA is determined based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the last year a COLA was determined to the third quarter of the current year. The CPI-W is determined by the Bureau of Labor Statistics in the Department of Labor. By law, it is the official measure used by the Social Security Administration to calculate COLAs.
The purpose of the COLA is to ensure that the purchasing power of Social Security benefits are not eroded by inflation—but The Senior Citizens League points out that this goal has not been achieved.
While next year’s high COLA is welcome, Social Security recipients are saying that years of low COLAs in the past made it next to impossible to cope with the rampant inflation of 2021, because COLAs haven’t nearly kept pace with some of the fastest growing costs of older households.
“Over the past 21 years, COLAs have raised Social Security benefits by 55% but housing category costs rose nearly 118% and healthcare costs rose 145% over the same period,” says Johnson. These two categories in particular are not adequately accounted for in the COLA.
Johnson says that few people will catch up with the higher COLA alone. “COLAs are intended to protect the buying power of Social Security benefits but, according to consumer price data through July of 2021, Social Security benefits have lost nearly one-third of their buying power, 32%, since 2000, about the length of a typical retirement,” she says. “Even worse, it appears that inflation is not done with us yet, and the buying power of Social Security benefits may continue to erode into 2022,” Johnson adds. Inflation is expected to continue well into next year.
Johnson had previously noted that higher gasoline and transportation prices in particular are behind the high COLA for 2022, because those expenditures are given greater weight or importance in the CPI-W.
While there is legislation under consideration in Congress to switch the COLA tether from the CPI-W to the more “senior-centric” CPI-E, such a change would have been damaging to seniors this year due to high gas prices.
“The big difference between the two is the weighting for gasoline,” Johnson said earlier this year. “In years in which gasoline prices spike, such as in 2021, then the CPI-W which is weighted more heavily for gasoline and transportation costs would yield the higher COLA.”
Still, over time Johnson says the CPI-E would yield higher COLAs and more lifetime Social Security income. “The benefit in old age (after 20 years in retirement) would be higher because the COLA is a lot like interest, and compounds over time,” Johnson said.
The COLA also doesn’t reflect cost increases in Medicare premiums and other rapidly growing Medicare costs. Research for The Senior Citizens League has found that Medicare Part B premiums are one of the fastest-growing costs in retirement. Medicare Part B premiums, which are automatically deducted from Social Security checks, often consume most, or even all, of the COLA increase.
The Centers for Medicare and Medicaid Services estimate that prescription drug plan premiums will increase almost 5% in 2022, and the Part D out-of-pocket threshold before reaching the catastrophic phase of coverage is growing by 7.6% from $6,550 in 2021 to $7,050 in 2022. Increases of this size in premiums and cost sharing are often an indication that insurers expect higher drug prices in the new year, Johnson points out.
SEE ALSO:
• 2022 Social Security COLA: Final Estimate Confirms it Will More Than Quadruple
• ‘Fair COLA for Seniors Act of 2021’ Introduced in House
• Fresh New-Look Social Security Statement Debuts
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
